China's Overinvestment and International Trade Conflict
31 Pages Posted: 23 Jul 2019
Date Written: 2019
For a long time, China's impressive growth performance has been driven by investment and high productivity gains. Based on the recent discussion on possible overcapacities and overinvestment in China, the paper investigates the sustainability of China's investment- and export-driven growth model. It is shown that since the turn of the millennium buoyant capital inflows and low interest rates have been at the roots of overinvestment and misallocation of capital, which necessitated export subsidies to clear markets. The overinvestment boom is argued to have ended around 2014. Since then, the overcapacities have weakened China's bargaining position in the US-Chinese trade conflict and have tempted the Chinese authorities to postpone a restructuring of the Chinese economy by low-interest credit provision. The resulting gradual reemergence of quasi soft budget constraints is seen to undermine China's long-term growth potential.
Keywords: China, investment, overinvestment, trade policy, credit growth, rebalancing, soft budget constraints, zombification
JEL Classification: E220, E430, E580, F130
Suggested Citation: Suggested Citation